Daily updates on climate change and the global economy.

Economy 24 Sept 2018 global crisis looms

The collective unconscious is roiled. Everyone intuits on some level that something big is brewing: “The 73rd United Nations General Assembly opens on Tuesday in New York with world leaders bracing for the next global crisis – and the rest of us uncertain about what they would do if it comes.

“Don’t be fooled by the fact that U.S. markets hit record highs this past week, that global growth remains steady, or that the Trump administration in its first two years has escaped any crisis of the sort that came with the 9-11 terrorist attacks of 2001, the 2003 Iraq War or the Lehman Brothers meltdown of 2008.

“In my many years of taking the global pulse around UN week, where more than 120 leaders will gather, I’ve seldom seen or sensed such uneasiness and uncertainty. I’ve never known a time when the potential sources of volatility have been so widespread geographically.

“The debate, hence, has become less about the likelihood of a crisis and more about what form it might take, with what severity it will strike, and whether world leaders will have the capacity to contain it.”


“The trade fight between the United States and China intensified Monday as the two economic superpowers hit each other with their biggest round of tariffs yet. The Trump administration imposed new 10% tariffs on $200 billion of Chinese goods just after midnight ET (noon in Beijing), spanning thousands of products… China retaliated immediately with new taxes of 5% to 10% on $60 billion of US goods such as meat, chemicals, clothes and auto parts. The moves are a significant escalation in the growing conflict between the world’s top two economies.”


“There’s a $6.3 trillion elephant in the room. And it just might cause the next recession. The last downturn was triggered by Wall Street and Americans accumulating too much debt — particularly in the sizzling housing market. A decade later, it’s Corporate America borrowing with gusto. Egged on by extremely low rates, US companies have piled on a record-setting $6.3 trillion of debt, according to S&P Global Ratings.”


“The country’s outstanding student loan balance is projected to swell to $2 trillion by 2022, and experts say a large portion of it is unlikely to ever be repaid; nearly a quarter of student loan borrowers are currently in a state of delinquency or default.

“Because of these loans, many Americans are unable to buy houses and cars, start businesses and families, save or invest.”


“China’s spiralling debt, a major concern for the slowing down of its economy, has risen to USD 2.58 trillion, a media report said Sunday.

“China’s local government debt balance stood at 17.66 trillion yuan (USD 2.58 trillion) by the end of August… Regarded as the “hidden debt”, the steady rise of the local government debt worries economists and regulators.”


“Surging interbank rates. A shock jump in the currency. Hong Kong’s decade-long liquidity party suddenly appears to be ending, and that can only be bad news for its expensive property market.

“The one-month rate known as Hibor rose 28 basis points on Monday, the most since December 2008…”


“The peso slumped to a 13-year low of 54.28 to the US dollar on September 17, bumping up the cost of imported food ingredients…

“This month, Duterte blamed the US President Donald Trump and the trade war with China for the inflation that has hit the Philippines. “Who started it? America!” Duterte said. “When America raised [tariff] rates and interest rates, everything went up.””


“Campaigning for Indonesia’s presidential election in April kicked off on Sunday, pitting incumbent Joko Widodo against a former military general in the race to lead the world’s third-biggest democracy…

“But his bid for a second term is facing headwinds over his economic record, with the Indonesian rupiah sitting at two-decade lows…”


“Inflation [in Japan] has stubbornly refused to tick up towards the bank’s two-percent target; growth has remained sluggish and the bank is stuck in neutral, without a major policy change in years. The bank is in “deadlock,” Shigeto Nagai, head of the Japan department at Oxford Economics told AFP. “They can’t tighten, they can’t ease further from here. They have to stick to the current policy but inflation will not rise,” added Nagai.”


“Infrastructure Leasing & Financial Services Ltd., an Indian conglomerate that has missed payment on more than five of its obligations since August, is seeking to raise more than 300 billion rupees ($4.2 billion) selling assets to cut debt, according to an internal memo seen by Bloomberg. The company, which has been categorized as a “systemically important” non-banking financial firm by the Reserve Bank of India, plans to sell 25 assets…”


“Iran’s Revolutionary Guards yesterday vowed “deadly and unforgettable” vengeance for the mass shooting at a military parade as Iran’s president blamed US-backed insurgents for killing 25 people in a hail of bullets… President Hassan Rouhani accused the US of inciting an unnamed ally in the Persian Gulf to carry out the attack… Mr Rouhani is on a collision course for US President Donald Trump, whose decision to quit the 2015 nuclear deal is, to Mr Rouhani’s mind, directly to blame for Iran’s crippling financial crisis.”


“Nandi Hills MP Alfred Keter has warned of a silent revolution in the country as a result of the ‘near collapse’ of the economy.

“Keter says the country, with the Sh 6 trillion debt and corruption cartels seizing most sectors of the economy, is literally bankrupt. In a statement, he blamed those in charge of the economy of living in denial and continuing to drive deep into more problems.”


“Zimbabwe faces a deepening economic crisis as hopes fade of a new wave of international investment and aid following historic elections in July…

“Majory Manjoro, a part-time currency dealer in Harare, said life had become unbearable. “Things are getting worse. Everything goes up [in price]. Those in authority need to make sure things get better,” Manjoro, 33, said.”


“”China equals Hitler” said the sign held up in the Zambian capital Lusaka by a protester opposed to Beijing’s tightening grip on the economy of the southern African nation…

“…his criticism echoes concerns shared by many across swathes of Africa and beyond, where some fear that China’s mega-projects risk leaving already fragile economies in even worse shape.”


“A Chinese navy hospital ship docked near Venezuela’s capital on Saturday as the OPEC nation’s deepening economic crisis garners the attention of the U.S. and other world powers.

“Defence Minister Vladimir Padrino was on hand to greet the People’s Liberation Army Navy’s ship, the Peace Ark, on its latest stop as part of the 11-nation “Mission Harmony” tour announced in June.”


“First went the chicken, then the sugar. Meat disappeared and bread soon after. Venezuela’s food shortages, skyrocketing prices and rampant crime made the decision for Veronica Garcia: She would find refuge in Buenos Aires. Instead, Garcia was greeted by Argentina’s currency crisis when she and her boyfriend, Miguel Nicorsin, arrived in late June.

“The peso is down 50% this year, inflation is climbing and the economy is sinking into recession.”


“There can be no doubt that the UK Prime Minister, Theresa May, suffered a hurtful humiliation in Salzburg, Austria this past week as the leaders of the other 27 European Union (EU) nations rejected her Chequers Brexit plan… Across the Eurozone the level of Debt:GDP stands at 86.7%. A far cry from the 60% limit that was established by the deeply flawed Stability and Growth Pact… Interest rates in the Eurozone have been fixed at 0.0% since March 2016 and there is no sense of conviction when the European Central Bank will be able to raise them again.”


“Germany, one of the world’s main maritime players, saw its commercial fleet shrink by a third over the past six years, becoming the biggest loser in a vicious industry slump that has reshaped global shipping…

“The contraction in German shipping stems from an unprecedented downturn over the past decade in which a glut of ships in the water, exacerbated by easy lending practices, pushed freight rates well below break-even levels.”


“Any increase in deficit spending that does not help boost structural economic growth could put Italy’s debt on an unsustainable course, the head of the Bank of Italy said… If budgetary expansion was accompanied by a fall in investor confidence, the impact on interest rates could be particularly marked, he said. The negative impact of this on economic growth (GDP) could put the debt-GDP ratio on “an unsustainable course”, he said.”


“Are we nearing another financial crisis? … the economic expansion is very mature, now about a decade old. Another downturn is only a matter of time. Global “synchronized growth” ended earlier this year, with emerging markets running into trouble. The U.S. is largely alone with robust GDP figures, and it is hard to believe that this rate of growth can be sustained with the expansion slowing elsewhere… The icing on the cake could be high oil prices… The stage is set for a downturn in the next year or two.”


“The US tariffs have already undermined global growth and weakened the WTO.

“In a world of cross-border supply chains and increasing interconnectivity, the unnecessary disruption to the iron and steel trade will result in less production not just in exporting countries, but also in the US. And the likelihood that other countries will retaliate makes the situation all the more dangerous.”


“The global economy could face a “relapse” of the crisis that rocked the world a decade ago, the Bank of International Settlements (BIS) warned in its annual report on Sunday, stressing that there would not be enough “medicine” available to treat the problem this time, AFP reported.

““Things look rather fragile,” BIS chief economist Claudio Borio told reporters. “There is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.””


Read the previous ‘Economy’ thread here.

Economy 21 Sept 2018 global growth has peaked

The OECD says that global growth may have peaked and says the outlook is less good now than it predicted in May:

[This article makes an important point but the suggestion that global growth will settle at a robust-sounding 3.7% next year flatters to deceive. In simple terms all growth is now predicated on, and enabled by, an historically unprecedented debt-bubble. GDP stats ignore this reality. Furthermore if we measure global GDP in US $ – and at the bottom of this thread I include an article by Gail Tverberg, explaining why this more accurately reflects economic reality – we can see that growth has not just peaked but stalled out entirely.]

“The west’s leading economic thinktank has warned that the expansion in the global economy may have peaked after cutting its growth forecasts for an array of rich and developing countries.

“In its latest update on the health of the world economy, the Organisation for Economic Cooperation and Development said the outlook for both 2018 and 2019 was less good than it had predicted in May.

“The Paris-based OECD called for immediate action to halt the “slide towards protectionism”, noting that trade tensions were already having an impact on confidence and investment.

“Britain has had its growth forecast shaved by 0.1 points in both years to 1.3% and 1.2%, respectively – with the OECD saying the squeeze on living standards was affecting consumer spending and uncertainty about Brexit leading to soft investment…

““The recent increase in risk spreads on Italian government bonds, and the associated decline in the equity prices of Italian banks, provide a demonstration of the pace at which continued vulnerabilities in the euro area can re-emerge,” the OECD said…

““Confidence has also eased and investment and trade growth have proved softer than anticipated. Business survey data point to slower growth in both advanced and emerging-market economies, and incoming new orders have eased, especially manufacturing export orders,” the interim economic outlook said.

“Recent problems in Argentina and Turkey have led to big cuts in the OECD’s growth forecasts…

“It warned… that the recovery since the recession of 10 years ago had been slow and only possible with an exceptional degree of stimulus from central banks. “A decade after the financial crisis, vulnerabilities remain in financial markets from elevated asset prices and high debt levels. Reforms have strengthened the banking system, but risks have shifted towards less tightly regulated non-bank institutions.””


“U.S. investors are keeping stock prices high as though the troubles in emerging markets were a world away. “But if you think financial contagion is ancient history, listen to Carmen Reinhart.”


“Turkey’s finance minister has lowered the country’s economic growth targets and promised to slash public spending by nearly $10 billion (€8.5 billion) as the country seeks to find a path out of a currency crisis…

“The Turkish lira has lost 40 per cent of its value against the dollar since the start of the year as investors have become increasingly fretful about the country’s economic health.”


“Egypt’s predicament is a reminder that although regional economic integration in the Middle East has never been particularly strong, which prevents some kinds of contagion, such as currency crises, the national economies of the region are connected in other ways.

“Poorer states are dependent on wealthier ones for oil and gas subsidies, direct financial support, and for the employment of millions.”


“Tunisia’s powerful UGTT union called a nationwide public sector strike for Oct. 24 to protest against what it called government plans to sell public companies, the latest tension with the government, which is under intense pressure. The country has struggled to fulfill donors’ demands to reform its economy and cut its budget deficit amid turmoil since the ousting of president Zine El-Abidine Ben Ali in 2011… the North African country is struggling with economic crisis and a ballooning budget deficit.”


“Although the US sanctions on Sudan were lifted in October 2017, creating much expectation in the general population that the economy would improve, the situation in the country has continued to deteriorate.

“According to the government, the inflation rate reached 64 percent, while experts say that in reality it could be as high as 100 percent.”


“The Namibia Statistics Agency (NSA) yesterday announced that quarter-on-quarter, the economy maintained the same pace of declining growth of 0.2%. This also means the contraction is worse than the -0,1% seen in the first quarter of 2018.

“The country has been in a recession since the second quarter of 2016.”


“The South African Reserve Bank held its key interest rate at a two-year low as the economy struggles through a recession and policy makers warned that investor sentiment toward emerging markets is a risk to the currency and adds to inflation pressures.

“The Monetary Policy Committee voted to hold the repurchase rate at 6.5 percent Thursday.”


“Inflation, now at a nine-year high of 6.4 percent and running above the central bank’s 2-4 percent target for the past six months, is eroding the purchasing power of Filipino consumers, the backbone of the Southeast Asian economy. The weaker peso, which fell to a 13-year low last week, is one major factor driving it. But even the families of the estimated 10 million overseas Filipinos who earn foreign currency are feeling the pinch as higher oil prices and heavy government spending are also pushing prices higher.”


“China’s growing economy has, over the years, disobeyed a range of economic laws. One of them is the Stein’s Law, according to which, something which cannot go on forever, will, eventually, come to a stop. China’s debt accumulation, however, does not seem to be slowing down… With the overwhelming nature of the threats the Chinese economy is facing, it seems rather sooner than later that the laws of economics will catch up, for the eventuality of which, China, and the whole world, should brace itself.”


“Donald Trump’s trade war is already harming global economic confidence and investment, and could soon hit jobs and living standards, top economists have warned.

“Goods directly affected by tariffs, such as Chinese washing machines sold in the US and American cars bought in China, have already been hit hard with prices jumping and sales tumbling.”


“The auto industry fears that President Donald Trump’s threat to place tariffs on vehicles coming into the U.S. could drive the economy into a recession, the head of the largest auto retailer in America said on Wednesday. “Everyone… in the automobile industry is freaking out around tariffs on automobiles,” Mike Jackson, chairman and chief executive officer of AutoNation Inc. said Wednesday.”


“It was left to Donald Tusk, president of the EU council, to deliver the coup de grace. The Chequers’ deal was unworkable because it undermined the integrity of the single market.

“And, by the way, its solution to the Northern Ireland border was just fantasy.”


“The 10-year anniversary of the Lehman Brothers bankruptcy has been met with a lot of reflection about how things have changed since the dark days of 2008. Craigs Investment Partners head of private wealth research Mark Lister said… the elephant in the room was the fact debt levels across the world were higher than they were in 2008.”


“Sheila Bair, former chair of the Federal Deposit Insurance Corporation, on Thursday warned that the economic recovery since the 2008 financial crisis has been largely driven by ballooning consumer and corporate debt, fueled by low interest rates.”


“Kolanovic doesn’t see potential problems until the second half of 2019 [but] a trade war with China, the speed of interest rate hikes and the unwinding of bond purchases by the Federal Reserve are factors that could change that timeline.

“Kolanovic notes that if markets fall by 40% or more, for example, the Federal Reserve may need to take drastic action to prevent a depression. This would mean the Federal Reserve could purchase equities or attempt to stimulate the economy through additional tax cuts.”


“World GDP in current US dollars is in some sense the simplest world GDP calculation that a person might make. It is calculated by taking the GDP for each year for each country in the local currency (for example, yen) and converting these GDP amounts to US dollars using the then-current relativity between the local currency and the US dollar.”


Read yesterday’s ‘Economy’ thread here.

Economy 20 Sept 2018 Argentina’s economy craters

“Argentina’s gross domestic product fell 4.2% in the second quarter from a year earlier… Argentina’s economy contracted sharply in the second quarter after a severe drought roiled agricultural production and as the country works with the International Monetary Fund to stem a spiralling economic crisis.

“”The economy will contract further in upcoming months amid tightening monetary and fiscal conditions…” the ratings agency Moody’s said in a statement.

“President Mauricio Macri asked the International Monetary Fund last month to speed up payments that are part of a historic bailout deal reached in June…

“The central bank raised its benchmark interest rate to 60% in August after the peso, which has shed about half of its value this year and is the worst-performing currency of 2018, continued to sell off.”


“Brazil’s central bank kept its key rate at an all-time low but cautioned of growing risks to inflation amid doubts over economic policy following presidential elections and global trade disputes.

“The bank’s board, led by its President Ilan Goldfajn, on Wednesday left the benchmark Selic unchanged at 6.50 percent, a stimulus it considered necessary given weak economic growth.”


“The South African Reserve Bank is contending with a currency that’s lost 17 percent to the dollar this year, expectations for quicker price growth, and pressure to increase the rate to keep up with the momentum of other jurisdictions.

“The economy entered its first recession since 2009 in the second quarter.”


“Constrained by high debt levels and the deficit, the appropriate policy mix for the medium term is expansionary monetary stance and tighter fiscal policy…

“In the meantime, the public sector must engage austerity as the Kenyan President has now signalled…”


“Government officials, economists and bankers are all warning that Lebanon is in an economic crisis and the situation is worsening.

“Workers and trade unions say they are planning protest action to press officials wrangling over portfolios to agree on a new government. The political uncertainty is affecting investor confidence…”


“Turkish President Recep Tayyip Erdoğan on Wednesday denied his country is facing a financial crisis, claiming that the country’s currency woes are a product of manipulation, pro-government NTV news reported. Erdoğan’s statements arrive as the country struggles with an embattled currency that has lost 40 percent value since the beginning of the year, while inflation has surged to 17.9 percent and may reach 20 percent during September or October…”


“According to Iran’s Central Bank in August, the inflation rate will reach 60 percent this year. The Iranian rial has hit a record low against the U.S. dollar amid a deterioration in the economic situation and the reimposition of sanctions by the United States. The country’s active work force is 26 million, of whom at least 10 million are jobless. Youth unemployment is at a staggering 40 percent. Many university graduates are unable to find a job.”


“South Korea’s central bank warned on Thursday that household debt was growing much faster than the Organization for Economic Cooperation and Development average as large mortgages and high rents drive up indebtedness.”


“[Japan’s] inflation has stubbornly refused to tick up towards the bank’s two-percent target; growth has remained sluggish and the bank is stuck in neutral, without a major policy change in years. The bank is in “deadlock,” Shigeto Nagai, head of the Japan department at Oxford Economics told AFP. “They can’t tighten, they can’t ease further from here. They have to stick to the current policy but inflation will not rise,” added Nagai.”


“Italy wants the public debt of all euro zone states to be brought below 60 percent of gross domestic product… At around 132 percent of GDP, Italy’s public debt is the second highest in the bloc after Greece…

“To help the reduction process, the ECB should offer a “guarantee” in exchange for “a mortgage on future tax revenue or individual public assets in the event of non-repayment of one or more instalments,” the 81-year-old economist writes.”


“UK inflation unexpectedly rose to the highest level in six months in August… The Office for National Statistics said the consumer price index (CPI) jumped to 2.7% last month from 2.5% in July, confounding economists’ forecasts for the rate to fall to 2.4%.

“The surprise increase will prove unwelcome for hard-pressed British households…”


“China’s manufacturing hub is already feeling an impact from the trade war. The manufacturing purchasing managers index for the southern Guangdong province fell below the threshold delineating a contraction in August, for the first time since early 2016, according to a Bloomberg analysis of data from the province’s Economic & Information Commission. Guangdong is China’s Silicon Valley and manufacturing center combined into one.”


“All 70 economists who answered an additional question in the Sept 12-19 survey said the trade conflict between the world’s top two economies is bad for U.S. growth… “Absolutely — it is a bad policy and definitely negative. But it is not bad enough to throw us into a recession, unless it translates to a big negative for confidence and sentiment,” said Jim O’Sullivan, chief economist at High Frequency Economics.”


“As of June 30, nearly one in 10 American homes with mortgages were “seriously” underwater, according to Irvine, California-based Attom Data Solutions, meaning that their market values were at least 25 per cent lower than the balance remaining on their mortgages… Lingering pain from the crash is deep. But it has fallen disproportionately on commuter towns and distant exurbs in the eastern half of the United States, Reuters analysis found.”


“As for the auto sector, while we have not seen a massive amount of information about it, recent numbers confirm a malaise is settling over the auto industry…

“it is likely jobs will be lost in both these important sectors of the economy in coming months. This will in itself create an economic headwind that affects overall growth.”


“For now, the conclusion of most Fedspeak has been a continuation of the steady but gradual pace of rate hikes and a continued unwind of the balance sheet… However, members of the Federal Open Market Committee clearly are wrestling with how much more work needs to be done before the rate-hike work is finished… On the downside, there’s the ongoing trade war with China, coupled with worry that global growth could be slowing due in part to central banks like the Fed beginning to normalize policy.”


“While some traders have cited the tariffs and trade concerns as inflationary and a culprit for higher rates, others have pointed to the Federal Reserve. “The explanations we’ve heard lean heavily on the notion that growth, a hawkish Fed, risk-assets, and supply have created an underlying bearishness that is evidenced by moves such as those seen on Tuesday,” said BMO Capital’s Ian Lyngen.”


Read yesterday’s ‘Economy’ thread here.

Economy 19 Sept 2018 – no lessons learned from 2008

“The financial crisis of 2008 was no ordinary crisis. It brought the U.S. banking system to its knees, destroyed millions of jobs, and nearly caused the break-up of the Eurozone. And this is just a short list of the damage it caused. Given how bad it was, it may have been reasonable to expect that we would now have a system in place to prevent another debacle. But ten years have passed and the idea that we have learned our lessons seems at best quaint and at worst laughable.

“One of the most basic lessons not learned is that a massive buildup of debt tends to end in a serious financial crisis. Even a small liquidity event that gets in the way of rolling over higher and higher amounts of debt eventually brings down the whole edifice.

“In the aftermath of the 2008 crisis, a river of ink was spilled to condemn the runaway debt spiral that led to it. It is remarkably ironic, then, that as we crawl out of ten painful years of struggle and recovery, even the most outspoken fiscal hawks of that time now seem unconcerned that debt is growing apace once more.

“Corporations everywhere took advantage of interest rates at all-time lows, borrowing as much as they could in the last few years. Many companies in the U.S. used the proceeds to buy back their own stocks.”


“What 2008 should teach us, if anything, is that we could all show a little more humility.”


“…financial globalisation makes the world vulnerable to U.S. monetary and fiscal policy. From time to time, the U.S. unleashes a flood of dollars at low rates. The world laps up the cheap finance. Then, the U.S. raises interest rates. Other economies find themselves staring at huge debt repayments… The present crisis in emerging economies highlights how vulnerable emerging markets are to the vagaries of American economic policy.”


“…the yield this year made it to a higher level than at any point in the last 6 years… These charts seem to offer technical analysis confirmation for those economists who are predicting that further rate hikes are in store just ahead and perhaps again later in the year.”


“Frustrated by the government’s recent arbitrary interventions in the markets, many businesspeople have taken their wealth and investments to other countries. Similarly, many of the highly skilled and educated people the Turkish economy depends on are leaving Turkey in droves.”


“South African policy makers may be about to consider whether to follow counterparts from Russia to Turkey and raise interest rates — even when the country is battling a recession… The South African Reserve Bank is contending with a currency that’s lost 17% to the dollar this year…”


“U.S. President Donald Trump’s trade battles and the accumulation of global debt to pre-financial crisis levels are among factors that will drive a major reset of the world economy in the next two to three years, according to the head of the world’s biggest long-haul airline.“We have some extraordinary geopolitical forces at play,” Emirates President Tim Clark told attendees at an aviation event in the Indian Ocean nation of Mauritius…”


“There are only two times in the history of this century where we had debt crises in which interest rates hit zero. And in both of those times, the Central Bank had to print money and go to a different type of monetary policy, which we call quantitative easing, and to buy financial assets. And that drives up, in both of those cases, the value of those financial assets and produces a recovery, but it drives interest rates down to zero or near zero, where they are around the world.

“And that buying, in this case $15 trillion of financial assets, has pushed up financial assets and driven the interest rates down to zero, so it’s caused asset prices to rise. It’s also caused populism, more populism. Because that process creates a gap between the rich and the poor. Those that have more financial assets see those asset prices go up… If you look at, right now, the top 10%, the top one tenth of 1% of the population’s net worth is equal, about, to the bottom 90% combined. That’s very similar to the late ’30s when we had that stimulation and so on.”


“The trade war between the United States and China just got a lot bigger after both sides announced their broadest waves of tariffs yet. The latest exchange of fire means the two economic superpowers will soon have imposed tariffs on more than $360 billion of goods. And analysts say the battle is likely to get worse, even as China starts to run low on ways to retaliate.”


“According to McKinsey world debt increased by $72trn during 2007-17 and one-third of that increase was in China. Much of that extra Chinese debt was in local government and in businesses. One-third of the Chinese corporate debt relates to the construction and real estate sectors. That in itself might cause warning signals: economic convergence between East and West could imply China is now imitating some of the features of the western economies prior to the crash of 2007-9… Contagion could also occur through the banking sector – some UK banks have made large loans in China.”


“Recently, though, there has been a big spike of failures in two areas. One is “wealth management companies,” or WMCs. These are unofficial-sector lenders who promise savers a rate of return much greater than that provided by official banks… As the defaults spiked this year, popular anger rose, and the government quickly shut down and dispersed protests in major cities… So rather than let this surge of defaults continue and let the chips fall where they may (and let public anger keep rising), the government has asked its four big “distressed asset managers” to step in and shore up the WMC and P2P sectors.”


“Former White House economic advisor Gary Cohn said President Donald Trump will work with Congress to pass a massive debt-fueled infrastructure bill if Democrats take control of the House of Representatives in November.”


“Ten years after the financial crisis, the Pew Research Center has asked people in 27 countries—representing two-thirds of global GDP—how they feel about their home economies and the future. The results are distressingly bleak.”


“As the trade war between China and the U.S. hits a boiling point, investors are taking their dimmest view of the global economy since the height of the European debt crisis. The tariff tensions aren’t the only thing bothering market pros: They also see rising risks from both a general slowdown in China as well as central banks finally shutting off the monetary spigots after years of ultra-accommodative policy.”


Read yesterday’s ‘Economy’ thread here.

Economy 18 Sept 2018 full-blown trade war

China has a huge debt-problem and a net energy problem, as its own energy production is dwindling. The last thing it needs is a full-blown trade war… “The trade war with China began in earnest Monday.

“In announcing a wave of tariffs on $200 billion worth of Chinese imports, President Trump said in a White House statement that his administration had concluded that “China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing United States companies to transfer technology to Chinese counterparts. These practices plainly constitute a grave threat to the long-term health and prosperity of the United States economy.”

“The statement said that the tariffs, which take effect September 24, would initially be 10 percent, but would rise to 25 percent at the beginning of the year, giving U.S. companies time to adjust their purchases. However, a senior administration official told Reuters over the weekend that Trump is likely to announce the new tariffs as early as Monday…

“It’s hard to see China caving to the U.S. demands when, as one official told the Wall Street Journal, Trump “has a gun to their heads.””


“China has no choice but to retaliate against the latest round of U.S. tariffs in order to safeguard its rights and interest in a free trade world, the country’s Commerce Ministry said in a statement on Tuesday.”


“Coming back to the US economy, while President Trump’s tax cuts have helped fuel the stock markets, trade war fears are taking a toll on investors’ sentiments. One casualty has been the synchronized global growth that some observers were touting.”


“…the poor rupiah has been put into the emerging market meat grinder. It has reached depths not seen since 1998. But, are the causes of the fall of the rupiah the same as they were in 1997-1998? In a word, “no.” … the recent plunge of the rupiah represents a collapse in confidence. And, as John Maynard Keynes stated in The General Theory: “The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention.” Once lost, confidence is hard to regain.”


“Turkey’s economic crisis is now hitting hospitals. Çapa and Cerrahpaşa Hospitals, both teaching hospitals and part of Istanbul University, are just two healthcare facilities now struggling to pay health workers and retain staff. Doctors at Çapa Hospital went on strike last week after they failed to receive supplementary payments for the past month.”


“Egypt canceled a treasury bond auction on Monday, its third such move in as many weeks, as foreign investors cut their exposure to the country’s debt at a time of weak appetite globally for emerging market assets… “The finance ministry has been canceling the bond auctions for the past few weeks due to higher yields than they are willing to accept,” said one banker at an Egyptian bank.”


“South African President Cyril Ramaphosa urged businesses to place a moratorium on job cuts as his administration tries to contain the fallout of a recession and institutes measures to reignite growth. The continent’s most-industrialized economy contracted 0.7 percent in the second quarter, after shrinking 2.6 percent in the previous three months…”


“In Argentina, prices are soaring, unemployment is high and the currency, the peso has lost half its value so far this year. Inflation rate is now at 34.4 percent – one of the highest in the world. For the indigenous population, already historically neglected by the state, the effects of the crisis are magnified.”


“The economy of this Central American nation [Nicaragua] has been undermined by the five months of social unrest, initially triggered by protests against a reform of the social security system in April, which grew and led to demands for the resignation of President Daniel Ortega and Vice President Rosario Murillo, his wife.”


“Dominic Raab has insisted that the EU must compromise in the Brexit talks as the European council president, Donald Tusk, warned that the “catastrophe” of a no deal scenario was “still quite possible”. In an interview with continental European newspapers, the UK’s Brexit secretary said it was the EU’s time to move on its red lines, and that warm words would not suffice with so little time left until Brexit day.”


“Fouskas warned: “Italy is already in recession. It has been having zero percent growth for several years now, an unmanageable debt spiral…

Italy faces the predicament of either brushing off the ECB rules of austerity and monetary discipline and inflate, the consequence being exit from the EMU; or deepen the austerity process and follow a path similar to that of Greece.

““Both paths are catastrophic for both Italy and the EU, especially the Italian people. Globally, too, the consequences will be catastrophic. Italy may well insert itself into those forces that undermine and eventually undo the process of globalization altogether…”


“But if extreme valuations by itself won’t bring this bull market to an end, what might end it? The biggest, fundamental problem right now is the extreme debt levels… we also have to look at the entire world as global debt levels have been growing… Especially dangerous are the extreme amounts of governmental debt… Italy would be a …country many investors are terrified of as it could run into serious trouble… Since 2007, corporate debt has increased more than 2.7 times… the high debt levels pose a systemic risk and as problems emerge, it is highly likely these will spread like a wildfire and can’t be contained.”


“..debts seem bigger than the ones that triggered the crisis 10 years ago… What is more worrying is that most likely the solutions adopted in 2008 would not be effective for the coming crisis. There would be no time to revive or pause the banking methodology. Interest rates are too low for the central banks to use facilitating credit to reinforce the economy.”


““Covenant-lite” deals are booming among leveraged loans, a sort of subprime debt often employed in corporate acquisitions. So far in 2018, they have constituted an estimated 34 per cent of all issuance by dollar value. That’s the largest share in at least a couple decades, with the exception of 2017. The lack of caution has coincided with the ascendance of Donald Trump to the presidency.”


“The average pay for Wall Street employees, when adjusted for inflation, jumped 13% last year to the highest level since the 2008 financial crisis and the third highest on record, according to a report released Monday. The average salary, including bonuses, for New York City–based securities-industry employees rose 13% to $422,500, the Office of the New York State Comptroller said.”


“The next US bear market is likely to be caused by a spike in 10-year Treasury yields and would risk setting off a $10 trillion crash in US household assets… “When the next recession comes, it is going to be deeper and last longer than in the past. We don’t have any strategy to deal with it,” Feldstein, a former chairman of the White House Council of Economic Advisers, said, adding that the heads of the economy lack emergency tools to recover in the event of a severe recession.”


“Interest rates could be stuck near rock-bottom levels for years to come as economists fear the economic cycle is already turning, with the recent global growth spurt showing signs of losing momentum.

“Ten years on from the financial crisis and growth may now be coming to an end, leaving the world’s central bankers short of ammunition, should they need to prop up their economies once again.

“Higher oil prices, rising US interest rates and the trade war have all combined to sap growth, indicating rates might need to be cut once more, according to economists.

““Global growth has shifted to a lower gear,” said economists at BNP Paribas.”


Read yesterday’s ‘Economy’ thread here.

Economy 17 Sept 2018 leveraged growth is not recovery

Highly leveraged growth is not true growth. Our ‘recovery’ is borrowed from a fantastical future of bountiful prosperity.

“As a profession, economists are absolutely hopeless at forecasting recessions… When a weather forecaster says a hurricane is imminent, the public does well to take notice. When an economic forecaster gives a similar warning, the chances are that it is already too late…

“Put simply, the cure for the Great Recession was for central banks to slash interest rates and to increase the supply of money by buying bonds from the private sector in the process known as quantitative easing. Debt levels in the private sector fell for a while as households and companies retrenched but have subsequently started rising again. Low interest rates were designed to provide incentives for investors to seek out riskier assets, which is what they have done.

“Money has flooded into emerging markets, where yields are juicier because the risks are higher. Turkey, where the central bank raised interest rates to 24% last week, is one example of what can happen in a world of footloose capital. Speculative money comes in from abroad. It finances a construction boom and drives up the exchange rate.

“Eventually, the trade deficit starts to balloon and inflation starts to rise. At that point, the speculators take fright and the exodus of capital triggers a fall in the exchange rate. At that point, the central bank has to raise interest rates to punitive levels to defend the currency and recession becomes inevitable.”


“Ten years after the financial crash that hit Western countries 10 years ago, triggering recessions, many of the scars on Britain’s economy have yet to heal – despite more than eight years of growth… Wages in inflation-adjusted terms are no higher today than they were in 2005.”


“The International Monetary Fund has warned that a “no-deal” Brexit on World Trade Organization terms would entail substantial costs for the UK economy… It said challenges in getting a deal done were “daunting” and warned against further UK interest rate rises.”


“The UK housing market is grinding to a halt as sales last month fell to their weakest August level in five years. Just 79,000 sales were completed in the month, down by 4pc on the year ­according to data from LSL Property Services and Your Move. Prices eked out a 0.1pc increase on the month, the first rise since March… This means house prices are rising more slowly than the cost of living, which rose 2.5pc in the 12 months to July.”


“Europe’s biggest debt collector says an increase in volumes in Sweden and Norway could be an early indication that households are starting to struggle paying off their consumer loans after debt burdens swelled to records. Volumes under Intrum AB’s existing credit-management services contracts in the two countries, in which it collects money from non-paying clients of financial institutions, grew by more than 15 per cent in the first half of the year.”


“A bird’s-eye view of Italian banking problems shows that most of them were direct consequences of the government debt crisis, the supply-side credit crunch that followed, and the downturn in the economy. A negative loop further depressed the performance of the economy and, in turn, affected the quality of the credit portfolio of banks… The next recession may hit before Italy adequately addresses remaining vulnerabilities.”


“Sudan’s President Omar al-Bashir on Sunday appointed a former finance official as central bank governor, a day after a new cabinet was sworn in and tasked with curbing soaring inflation and a shortage of foreign currency… The central bank has been grappling with an acute shortage of foreign currency at a time of hyper-inflation that touched almost 68 percent in August. The Sudanese currency has plunged, trading on Sunday at 42 pounds to the US dollar on the black market, compared with the official rate of 28.”


“Nigeria’s National Bureau of Statistics (NBS) says that the country’s inflation rate for the month of August rose to 11.23 percent,The NBS said in the report for the CPI for the month of August, released on Friday in Abuja that the figure represented a 0.09 percent point higher than the 11.14 percent inflation rate recorded in July 2018.”


“Argentina is struggling to shore up its peso, which has more than halved in value despite punitive interest rate rises to 60%. Other currencies have been caught in the slipstream, with India’s rupee plumbing record lows and South Africa’s rand, Russia’s rouble and Brazil’s real losing 15-20% this year so far. Signs are appearing that months of market turmoil are starting to take the toll on real economies…”


“South Korean households saw their debts increase sharply with per-person debt expected to top 30 million won ($26,700) this year, data showed Sunday… Bank of Korea Gov. Lee Jue-yeol has said the total amount of household credit is still at a high level and is expanding at a faster pace than that of household income. “It is hard to deny that the financial imbalance is getting wider and wider due to a lower interest rate,” he said earlier. “It is necessary to prevent a further imbalance and make efforts to ease it.””


“Economic troubles in emerging markets and the ongoing trade war between the United States and China could potentially increase the risk of the next financial crisis, according to the chief executive officer at South Korea’s sovereign wealth fund.”


“China will not be content to only play defense in an escalating trade war with the United States, a widely read Chinese tabloid warned, as President Donald Trump was expected to announce new tariffs on $200 billion in Chinese goods as early as Monday. Beijing may also decline to participate in proposed trade talks with Washington later this month if the Trump administration goes ahead with the additional tariffs…”


“Dozens of officials in central China’s Hunan province have been punished for illegal debt accumulation for their local government, the Ministry of Finance (MOF) has revealed. The punishments come amid rising concern over the deteriorating finances of some areas in the province that have caused breakdowns in local government operations, including, in one case, the failure to pay civil servants’ salaries.”


“China’s main Shanghai Composite index fell to its lowest close in nearly four years on Monday as reports said U.S. President Donald Trump would unveil new tariffs on $200 billion of imported Chinese goods this week. The Shanghai Composite index dropped 1.1 per cent to 2,651.79 points, its worst close since Nov. 27, 2014.”


“Ten years after Lehman Brothers collapsed, high-octane products like those which led to the destruction of the American banking giant are making a comeback… Those linked to this effort have included former bosses from failed bank Northern Rock, Adam Applegarth, and Lesley Sewell. Guy Batchelor, former senior vice president at Lehman’s european mortgage division…

“Some 80pc of the junk-rated, or below investment grade loans, are regarded as having light touch conditions, more than triple the level seen in 2006-2007, according to Moody’s. Meanwhile experts have warned that the financial sector remains “brittle”.”


Read the previous ‘Economy’ thread here.